Dolphin Energy bond 'vulnerable to pull-back'

Abu Dhabi, February 16, 2012

A $1.3 billion, 10-year bond from Abu Dhabi's Dolphin Energy is attracting huge demand in the Gulf's secondary debt market, but it is reaching levels which it may not be able to sustain in the long term, say analysts.

The frenzy over the bond illustrates the distortions which can occur in the region's bond market because of uneven supply of high-grade debt. Dolphin's bond is this year's first highly rated conventional issue from the Gulf, so it has a scarcity value which may not persist once more supply hits the market.

Dolphin's 2021 bond has rocketed in price from par when it was issued on February 8 to just under 103.0 bid on Wednesday, yielding about 5.1 per cent.

The company reportedly attracted orders of over $9 billion for the bond, with about 80 per cent of allocations going to US and European buyers. These international investors were hungry for easily assessed corporate credits from the Gulf.

'Typically, US investors like project-based investments which lend themselves to tangible analysis and are to an extent more visible than sovereign entities,' said John Bates, head of fixed income at London-based asset manager Silk Invest.

Adding to the demand for the bond was the fact that the pricing was considered wide for an Abu Dhabi name. The bond was launched at an indicative yield of 5.75 per cent, which tightened to 5.5 per cent due to oversubscription; the $1.3 billion issue included a tap of $300 million at a yield of 5.33 per cent.

Demand for the Dolphin bond, rated A1 by Moody's, is so strong that it has traded through the $1.5 billion, 5.5 per cent bond maturing in 2022 from Abu Dhabi's more highly rated International Petroleum Investment Company (IPIC). That bond, rated AA by Standard & Poor's, was bid around 101.75 yielding about 5.28 per cent on Wednesday.

At the same time, the price of the Dolphin bond remains some distance below that of the $750 million, 5.5 per cent bond maturing in 2021 that was issued by Abu Dhabi investment fund Mubadala Development Company. Its bond was bid on Wednesday at 104.8 to yield about 4.84 per cent.

Dolphin is majority-owned by Mubadala, which is rated AA by S&P to reflect the expected level of government support for the company.

'Mubadala and IPIC are probably the best comparables. The fundamental differences are that Dolphin represents an actual project which can be analysed in its own right, while IPIC/Mubadala are essentially plays on the government of Abu Dhabi,' said Bates.

There are risks to Dolphin's rally which may have been neglected in the scramble to get a piece of the bond, however.

One threat is the possibility that regional or global market conditions could worsen back to where they were in mid-January. Since then, investors have become less concerned about a messy resolution to the euro zone debt crisis, but as the struggle to restructure Greece's debt drags on and its economy worsens, systemic fears in Europe could revive.

Another threat is the possibility of military action related to Iran's nuclear programme and the tightening economic sanctions against the country.

Abu Dhabi's five-year sovereign credit default swaps were at 131 basis points on Wednesday, down from 148 in mid-January.

A bigger threat is the prospect of more high-grade supply in the Gulf. Since Dolphin's issue, Qatar National Bank has issued a $1 billion bond which was five times oversubscribed.

More issuance is anticipated, particularly from top-rated names in Qatar or Abu Dhabi. Prasad Ananthakrishnan, the International Monetary Fund's head of mission to Qatar, told Reuters in an interview last week that upcoming Qatari debt issues could total $20 billion or more. The market does not expect nearly that amount of Qatari debt this year, but issues could still be substantial in the first and second quarters of 2012.

Meanwhile National Bank of Abu Dhabi is meeting fixed income investors in the UK and Switzerland this week, though an NBAD official told Reuters the meetings were not related to any plans for an imminent bond issue.

'Investors should be nimble at this point as a flurry of high-grade new issues could cause a sell-off in other similar names,' said a senior regional fixed income trader.

Another trader said some signs of increased selling interest in the Dolphin bond had emerged among Asian investors this week.

Biswajit Dasgupta, head of treasury and trading at InvestAD, said Dolphin was attractive to investors as it was transparent and project-based, making it easier to assess future cash-flow.

But he added, 'The 2021s are still expected to gain, levels of 102.75/103 are possible. But this rally is likely to be short-lived to finally settle at 102.25/102.5 levels.' – Reuters